Targeting attractive returns with limited downside risk

21-12-2016 | Insight

Boosted by falling bond yields and rising equity markets, multi-asset products have enjoyed increasing popularity over the past few years. But the prospect of rising interest rates and the possible end of the bull market in equities raise doubts as to whether they can keep on delivering high and stable returns. Our new Conservative Multi-Asset strategy intends to address this concern.

Klaas

Smits

Executive Director Quant Allocation Products

Shengsheng

Zhang

Senior Portfolio Manager Multi-asset Quant

Speed read

A comprehensive portfolio solution built on proven capabilities

Combines low-risk investing with dynamic asset allocation

Aims to win by losing less in bear markets

The Robeco Conservative Multi-Asset strategy aims to generate stable returns while putting a strong emphasis on limiting downside risk. “We’ve seen increasing demand for multi-asset solutions and wanted to offer something really different to what is already available in the market,” say Klaas Smits and Shengsheng Zhang, two portfolio managers from Robeco's Multi-Asset team.

This new fund leverages on Robeco’s well-established know-how in systematic low-risk investing and asset allocation to offer a well-diversified, truly dynamic and conservatively managed portfolio, with full transparency on positioning and performance attribution.

The result is a unique combination of three proven Robeco quantitative strategies managed by seasoned investment teams. Global Conservative Equities (50% of the investment mix and Global Conservative Credits (35% of the mix) form the stable core of the strategy. Meanwhile, the dynamic allocation part (15% of the mix) is based on Global Tactical Asset Allocation and look for opportunities across a range of different asset classes, with a focus on reducing downside risk.

“To build this new solution, we combined our knowledge of low-risk investing together with extensive feedback from clients,” says Klaas Smits. “This makes it a natural extension of our product range”, he adds. It also offers retail investors access to Robeco’s institutional Conservative Credits strategy.

Flexible positioning

One key characteristic of the fund is that its rules-based approach fully utilizes all asset-class bandwidths. In practice, this means it can neutralize its exposure to equity markets during downturns and short interest rate risk when yields are expected to rise.

‘Clients question whether bonds can still be considered as a safe haven’

The new strategy is also significantly less dependent on traditional equity-bond correlations than most competing products. Many existing multi-asset solutions rely heavily on the premise of a negative correlation between equities and bonds, that underpins the usual pendulum swings between the two asset classes when market conditions change.

“But given the current ultra-low yield environment, a growing number of clients have started questioning whether bonds can still be considered as a safe haven,” says Shengsheng Zhang. “Our flexible approach to asset allocation addresses this investment dilemma, as we can be bearish or bullish on both bonds and equities at the same time,” she adds.

Losing less in bear markets

Because its direct exposure to government bonds remains purely tactical, the Conservative Multi-Asset fund features a base duration of between one and two years, structurally lower than most existing multi-asset funds.

Over time, the strategy aims to maintain a portfolio duration between -6 and +8 years, and an equity beta between 0 and 0.4. Its annualized volatility is expected to average 5%.

Smits and Zhang expect the fund to significantly reduce losses during market downturns and to be able to keep track during moderately upward moving phases. The flip side is that they also expect the strategy to lag in strong bull markets. “This is consistent with the conservative investing philosophy developed at Robeco. Ultimately, our goal is to win in the long run by losing less in bear markets,” says Klaas Smits.

More specifically, the fund’s goal is to generate stable returns in line with a balanced mix of 50% equities and 50% bonds, while having a risk profile in line with a defensive mix of 30% equities and 70% bonds.

Proven track record

Robeco has long been a pioneer in the field of low-risk investing. Its Global Conservative Equities and Conservative Credits strategies, respectively launched in 2006 and 2012, boast a track record of consistently superior risk-adjusted returns, with reduced volatility compared to generic indices. For example, since inception, the Global Conservative Equities fund has generated an annualized outperformance of 2.9% against the MSCI World Index, with a 28% reduction in volatility*.

Meanwhile, the dynamic allocation pocket leverages on Robeco’s Global Tactical Asset Allocation strategy, which has also delivered a strong annualized return of 10% since it was launched back in 2010**.

The comparison of simulated returns with a group of 12 selected peer funds, over a five-year period (2011 to 2015), suggests the Conservative Multi-Asset strategy should be able to generate a performance close to that of the best of these, with significantly lower-than-average risk and cost levels. “It features a better risk-return profile than most existing multi-asset solutions. The low level of correlation with peers and the unique rules-based approach make it an interesting addition to the multi-asset fund product range,” says Shengsheng Zhang.

*Source: Robeco Performance Measurement. Monthly data since inception in October 2006 up to November 2016, gross of fees, based on net asset value of Robeco Institutional Conservative Equity Fund (EUR). The Robeco Institutional Conservative Equity Fund has been unhedged for currency risk since June 30 2012. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future. **Source: Robeco Performance Measurement. Figures based on the monthly data of Composite Robeco QI GTAA Plus Fund since inception in June 2010 up to November 2016, gross of fees. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.

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